When The College Dorm Is Not Good Enough For Junior
While college dormitories are where most students live when they go away to school, some baby boomer parents are exploring another option: buying a residential property for their child to live in near the school.
Financial planners say that buying a property can be a viable alternative to the dorm room if parents know the real estate market in the college area and more importantly, know their child.
Patricia Raskob, a certified financial planner with Raskob Kambourian Financial Advisors, Ltd., Tucson, Ariz., purchased a 3-bedroom house when her son entered college.
Prior to buying a home, however, Raskob advises parents to think about how they feel about being a landlord, as well as “what is available and what is the cost.”
Know your children is another piece of advice that Raskob offers. Your children may be astute, she says, but do they know how to fix a leaky toilet?
Her son was handy and was able to maintain the property, Raskob adds.
Raskobs positive experience also was shared by all but one of the 8 clients (out of approximately 150) who have chosen to buy a property rather than put their children in dormitories, she says.
In that one instance roughly 8 years ago, according to Raskob, the Orlando area of Florida was experiencing a real estate slump and the family, including the child, was moving to another part of the country. They did not have the time to wait until the market turned around, Raskob continues.
The idea of buying a property for your college student can work, says Jim Holtzman, a CPA with Legend Financial Advisors, Pittsburgh, but “generally speaking, I dont get too excited about this type of proposal.”
There are a lot of questions that need to be answered first before a decision is made about purchasing a residential property, he continues.
Chief among them is whether it is realistic to expect a student to maintain a property purchased by parents, Holtzman says. Will the student also be able to maintain his studies? “There is a rate of return there also,” he adds.
Of course, a property manager can be hired, but then that expense hits the bottom line, according to Holtzman.
Plans to maintain the property must also be made if a child returns home for break and to make sure that any renters pay bills and pay them in a timely manner, he continues. And, the possibility of a vacancy rate needs to be considered, he adds. “It can become a financial issue of cash flows,” Holtzman says.
But if these questions can be answered, the right property in the right area can offer appreciation, he says. If a college is in a newer area that is developing then there can be a sufficient run up in value to make it possible to turn a profit in a 4-year period, Holtzman says. But if it is in a more established area, then the chances of the property escalating greatly is less likely, he continues.
A typical equity investment can earn in the 8-12% range but the illiquidity and risk tied to the purchase of a property would necessitate a 16-20% return, Holtzman continues.
Sometimes what starts as a real estate investment for a childs college years develops into a more long-term investment, according to Joseph Murtagh, a certified financial planner with the SOURCE, Goshen, N.Y.
Murtagh recalls a client who purchased a dwelling near Edinburgh, Scotland, for a child attending the University of Edinburgh. After graduation, the parents kept the dwelling as a European residence, he continues.
Questions to ask, Murtagh says, are whether the market has peaked, where it is currently and what are the rental opportunities.
Murtagh recommends considering a business entity such as a limited liability corporation or sole proprietorship as a structure for owning the property in order to limit liability.
Typically, parents who are considering such a purchase would not be eligible for much, if any, in the way of financial aid, he adds. However, if the property is put in the childs name, it could impact available aid because aid calculations put more weight on a childs assets, he says. Typically, 35% of the childs available assets would be counted toward tuition.
However, if financial aid is not an issue, then a couple who wants to remove assets from their estate could gift $11,000 per parent to the child on an annual basis, applying the amount to the down payment on the property and afterwards, the mortgage.
George Middleton, a financial planner with Limoges Investment Management P.C., Vancouver, Wash., notes that usually a child moves on after college and the property is sold. If the property is in the childs name, there would be a 10% capital gain, he says, while if it is in the parents name, the capital gain would be 15%.
But, Middleton says he knows someone who bought a condominium in San Luis Obispo rather than opt for a dorm room for his child and was pleased with the results.
There were several roommates and the child lived rent free, he continues.
The key is location and timing, Middleton adds. The property was bought “following the dot-com bust, so they probably got a good price.”
In his own case, he says that he has 2 daughters for whom he considered buying a property. However, it was in a Seattle neighborhood around the University of Washington where homes were more than $1 million and large appreciation was unlikely. This, coupled with the fact that available properties were not in great condition, suggested a large initial outlay before the property could be brought up to snuff, he continues.
The cost of different types of property also affects the purchase, he says. For instance, a multiple dwelling offers additional cash flow but requires a greater initial investment, Middleton says.
The experience a child gains from taking responsibility for a property also can be considered an investment, he adds.
But, if the property is rented out during the summer months, “it might be party city. You have to be careful about who you rent it to.”
Reproduced from National Underwriter Life & Health/Financial Services Edition, February 20, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.